UBS’s $2 Billion Loss May Revive Calls to Shrink Investment Bank

The UBS AG company logo sits at the bank's headquarters in Zurich. The lender may book a loss in the third quarter of 2011, it said today in an e-mailed statement. Photographer: Peter Frommenwiler/Bloomberg

Gruebel today called the loss “unauthorized” and
“distressing” in an e-mail to employees, without giving
details of how Switzerland’s biggest bank lost the money. A 31-year-old man was arrested in central London today, police said.

“Shareholders will be fuming,” said Chris Roebuck, a
visiting professor at the Cass Business School in London. “It
will yet again confirm to the majority of shareholders, who are
Swiss, that investment banking is not ‘proper’ banking.”

The investment bank, which posted 57.1 billion Swiss francs
($65 billion) in cumulative pretax losses in the three years
through 2009, has since struggled to match its peers’ gains from
sales and trading, even after adding employees and increasing
risk. The wealth management units, which generate 41 percent of
UBS’s revenue, have been attracting net new money over the past
year after clients pulled assets in the credit crisis.

“The key area of damage in our view is reputational and
extends beyond the investment bank, into UBS’s private banking
business,” analysts at Goldman Sachs Group Inc. led by Jernej
Omahen wrote in a note to clients today. It “therefore adds to
the long list of arguments and pressure for a substantially
smaller investment bank.”

Lehman Anniversary

No client positions were affected, the Zurich-based company
said in a statement today, the third anniversary of Lehman
Brothers Holdings Inc.’s collapse. The loss, discovered
yesterday afternoon, occurred in the bank’s equities unit in
London, NZZ newspaper reported. UBS spokeswoman Tatiana Togni
declined to comment beyond the bank’s statement.

The shares fell as much as 9.6 percent in Swiss trading,
and were down 7.6 percent at 10.10 francs by 12:10 p.m., for a
market value of 38.7 billion francs. The stock has dropped 34
percent this year.

Gruebel, who was brought out of retirement in February
2009, has sought to install tighter controls at the investment
bank. After joining UBS, he started weekly calls with top risk
officers and was personally monitoring traders’ positions
together with Carsten Kengeter, who heads the investment bank.

Gruebel began his 37-year career at Credit Suisse, which he
headed before retiring in 2007, at the bank’s Eurobond trading
desk in 1970. By 1991, he had become head of global trading.
Under his leadership, the Zurich-based bank started cutting its
holdings of U.S. subprime mortgage bonds in 2006, when
competitors -- including UBS -- were still buying them.

‘Digestible’

The loss amounts to about 4 percent of UBS’s tangible
equity and 5 percent of its core Tier 1 capital, making it
“large, but digestible,” the Goldman Sachs analysts said.

UBS said in July it won’t reach its target for pretax
profit of 15 billion francs by 2014 and announced job cuts to
revive earnings. The lender will publish the results of a review
into the investment banking division in November.

“This could be a critical tipping point for UBS’s
strategy,” said Simon Maughan, head of sales and distribution
at MF Global Ltd. in London. The investment bank “looks
unreformed, unwieldy and ultimately unsustainable.”

Analysts had suggested in July, when UBS announced the
review, that the bank would scale back its investment bank to
conserve capital and bolster profitability.

Gruebel, 67, and Kengeter, 44, have been trying to revive
earnings at the unit for two years. They hired more than 1,700
people and brought in new divisional heads to replace those that
departed. They’ve also increased risk-taking to bolster
earnings.

Value-at-Risk

While competitors have been cutting risk, UBS has been
increasing value at risk, a measure of potential trading losses
on a given day. UBS’s average VaR for the second quarter climbed
to 75 million francs, the highest since the fourth quarter of
2008, from 48 million francs in the year-earlier period.

By comparison, VaR at JP Morgan Chase & Co.’s investment
bank dropped to $77 million from $90 million in the year-earlier
period. At Deutsche Bank AG, the measure declined to 75 million
euros in the second quarter, the lowest since the final three
months of 2006.

Among the nine biggest investment banks, UBS’s share of
revenue from trading stocks and bonds and advising clients on
capital-market transactions and mergers more than doubled from
2009 to the first half of this year. Even so, it remained the
lowest amongst its peers, data compiled by Bloomberg show.

The unit has suffered a series of departures in Europe and
the U.S. Neal Shear, the Swiss bank’s head of global securities,
quit in March, as did Dimitrios Psyllidis, co-head of fixed
income. John Wall, a UBS veteran of more than 23 years and co-head of investment banking since September 2009, retired this
year and Matthew Koder, head of the global capital-markets
business, also left.